It was a dream that began nearly 15 years ago, when Craig Venter, a Vietnam veteran turned geneticist, resolved one day to create a genome from scratch – and with it, make the first ever synthetic life form. Last night, in a dramatic announcement that led some to accuse him of playing God, Venter said the dream had come true, saying he had created an organism with manmade DNA.

The feat, hailed as an epochal scientific breakthrough by some but an alarming development by others, was achieved by scientists at the J Craig Venter Insititute in Rockville, Maryland using little more than a computer, some common microbes, a DNA synthesizer and four bottles of chemicals.

The result – after $40m (£28m) and more than a decade – is the first microbe that thrives and replicates with only a synthetic genome to guide it. Every "letter" of its genetic code was made in the laboratory and stitched together, forming an artificial chromosome 1m characters long.

Despite the scale of the achievement, the organism in question could scarcely be more lowly – it is based on a bacterium that causes mastitis in goats.

While scientists and philosophers have already begun to debate the potential consequences and moral implications of the work, the motivating force for Venter is commercial. His team has an even more ambitious dream: to create organisms that are not only new, but also lucrative. Venter has secured a deal with the oil giant ExxonMobil to create algae that can absorb carbon dioxide from the atmosphere and convert it into fuel — an innovation he believes could be worth more than a trillion dollars.

The new bacterium, Venter said, is "the proof of the concept that we can make, in theory, changes across the entire genome of an organism, that we can add entirely new functions, eliminate those we don't want, and create a new range of industrial organisms that put all of their effort into doing what we want them to do. Until this experiment worked, the whole field was theoretical. Now it is real."

To create the organism, Venter's team began with a computer reconstruction of the genome of a common bacterium, Mycoplasma mycoides. The information was fed into a DNA synthesizer, which produced short strands of the bug's DNA. These strands were then stitched together by inserting them first into yeast and then into E coli bacteria. The bugs' natural repair mechanisms saw the strands as broken fragments and reassembled them.

After several rounds, the scientists had pieced together all 1m letters of the bacterium's genome. To mark the genome as synthetic, they spliced in fresh strands of DNA, each a biological "watermark" that would do nothing in the final organism except carry coded messages, including a line from James Joyce: "To live, to err, to fall, to triumph, to recreate life out of life."

The crucial step came next. The scientists took the synthetic genome and transferred it into another kind of common bug. As this bug multiplied, some of its progeny ditched their own DNA and began using the synthetic genome. Then the transformation began.

"It's pretty stunning when you just replace the DNA software in the cell. The cell instantly starts reading that new software, starts making a whole different set of proteins, and in a short while, all the characteristics of the first species disappear and a new species emerges," Venter said.

Venter calls the organism a "synthetic cell" because it survives thanks to a manmade genome, but apart from the watermarking woven into its DNA, it behaves like any other M. mycoides. Some scientists argue it is not a new kind of life, but others say that does not detract from the feat. "This is a remarkable advance," said Paul Freemont, a synthetic biologist at Imperial College London. "The applications of this enabling technology are enormous."

But the work drew immediate criticism from others who fear it could trigger an environmental disaster or hand a gift to terrorists bent of developing weaponised microbes. "This is a step towards something much more controversial: creation of living beings with capacities and natures that could never have naturally evolved," said Julian Savulsescu, an ethicist at Oxford University. "The potential is in the far future, but real and significant: dealing with pollution, new energy sources, new forms of communication. But the risks are also unparalleled. These could be used in the future to make the most powerful bioweapons imaginable."

Pat Mooney, of the ETC group, which opposes synthetic biology, said: "This is a Pandora's box moment. Like the splitting of the atom or the cloning of Dolly, we will all have to deal with the fallout from this alarming experiment."

Venter agrees that stringent regulations are needed to ensure synthetic organisms do not escape and cause damage. "It's clearly a dual-use technology and that requires immense responsibility for whoever's using it," he said. "We are entering an exciting new era where we're limited mostly by our imaginations."

And if the microbe were, somehow, to escape the tight security of Venter's lab? "It will not grow outside the lab unless it is deliberately injected or sprayed into a goat. And we don't work with goats."